6 Principles of Marketing - No. 3 LCV

LCV stand for 'Lifetime Customer Value'. It is a method of working out how much you can spend to acquire a new customer.

The standard way of working out whether a particular marketing tactic - say an ad in the paper or perhaps an email campaign - worked, is to assess the cost of the promotion directly against the sales that resulted. For example...

  • Cost of ad in paper $500
  • Average price of item you are promoting $25

So you need to sell 20 items from that promotion for it to break even and more than 20 and you're in profit. In practice the sums are not so easy (although that's not to say they're not worth doing!) - how long do you give people to respond to your promotion? Who may have seen the ad, not taken up the promotion, but come into your store at a later date because of the ad?

The other factor not taken into account in the calculation above is the value of any new customer you have acquired via the promotion over their lifetime.

The Lifetime Customer Value approach says 'how long do you generally keep a customer for, and what is their value over that period in terms of what they purchase from you?' Take the example of a hairdresser. If a new customer comes into your hairdressing salon and likes the way you have done their hair, they are likley to come back again and again.

You have to then calculate how long you keep a customer on average - this is unlikely of course to be their natural lifespan (although it may be!), but how long they stay with you. They may move away, or decide to try another hairdresser for whatever reason, and looking at past data will give you an idea of this average lifetime value. So let's do the sums again...

  • Cost of ad in paper $500
  • Average price of item you are promoting $25
  • Average customer lifetime 3 years
  • Number of hairdressing visits 10 per annum

Actual $ value over lifetime $750

On this calculation, that $500 ad expenditure is covered by just one new customer worth $750 over three years.

Next time... ABT.